Ignoring the facts won't help us address the insolvency of pay-as-you-go social programs.

I was fortunate enough to be invited back on Max Keiser's Keiser Report for a wide-ranging discussion of Peak Retirement, currency wars and more. Since the topics Max raises are profound and not always that easy to summarize (if there is another media host who covers complex topics in such profusion and with such a diverse range of guests, he/she is unknown to me), I'm devoting the next few blog entries to offer context for the topics Max and I discussed.

Max's first question related to my entry on Peak Retirement (October 15, 2013) in which I showed that the ratio of full-time workers to Social Security beneficiaries has dropped to 2-to-1.

Why does this matter? It matters because our social programs are pay as you go, meaning that current workers pay current retirees' benefits. There is no "trust fund" and the proof is simple: now that Social Security is operating at a deficit, i.e. payroll tax revenues no longer cover benefits paid out, where does the U.S. Treasury get the money to pay the benefits not covered by tax revenues?

It sells bonds, just like it does to fund any other deficit spending of the federal government. The Trust Fund is a politically useful fiction, period, end of story. The bonds in the bogus Trust Fund are non-negotiable, i.e. worthless. The Treasury funds Social Security deficits by selling Treasury bonds.

(Social Security reports "interest earned" on the phony non-negotiable bonds, but where does the U.S. Treasury get the money to pay the interest? It sells T-Bills, adding to the national debt. No matter how you slice it, the programs' deficits are funded by selling debt, i.e. T-Bills, just like all federal deficit spending.)

I bobbled my response to Max's question, so he helpfully stepped in and explained that social programs like Social Security and Medicare are paid by payroll taxes, not income or other taxes. Employers and employees both pay 7.65% of earned income/wages to fund these two monster programs--a total payroll tax of 15.3%. (12.4% is for Social Security and 2.9% is for Medicare.)

Those who receive no earned income (self-employment earnings, wages, salaries, tips, etc.) and only receive unearned income (dividends, capital gains, rents, etc.) pay no Social Security/Medicare payroll taxes. That's one reason why unearned income is so sweet: it avoids the 15.3% payroll tax right off the top.

(Those of us who are self-employed pay the entire 15.3%.)

This means these programs depend entirely on payroll taxes from employed people. The taxes collected are non-trivial: Social Security brought in $725 billion in cash and paid $773 billion for benefits and overhead expenses in 2012.

The Social Security Administration (SSA) publishes a helpful chart of all earned income reported on federal tax returns:Wage Statistics for 2012. This data will help us understand why the system depends not just on those with any old job but those with good-paying full-time jobs.

(Recall that high-income earners only pay payroll taxes on the first $113,700 in 2013 and $117,000 in 2014. So someone earning $1,000,000 a year pays the same Social Security tax as someone making $113,700.)

Let's illustrate the importance of the full-time job/beneficiary ratio by asking: how many workers does it take to fund one retiree's annual benefit? Since even a low-lifetime earnings debt-serf like me can get $2,100 a month in Social Security bennies (if I wait until 70 to collect), and higher lifetime earnings folks get $25,000 a year at full or even early retirement, let's ask: how many workers' payroll taxes does it take to fund one retiree getting $25,000 a year from Social Security?

Over 23 million people reporting earned income made less than $5,000 a year. The SSA reports their average compensation was around $2,000. The Social Security payroll tax is 12.4%, so 12.4% of 2,000 is $248 a year in Social Security payroll tax.

It takes 100 of these workers' Social Security payroll tax to fund one retiree.Another 14 million workers earn between $5,000 and $10,000, with an average of $7,400. At $7,400, each worker pays $917 in Social Security payroll tax. It takes 27 of these workers' payroll taxes to fund one retiree.

About 12 million workers earn between $10,000 and $15,000 a year, with an average of $12,460. Their Social Security payroll tax works out to $1,545 annually. It takes 16 of these workers to fund one retiree.

Cumulatively, that's around 50 million workers, or a third of the entire workforce.These 50 million people earn about the same amount ($153 billion) as the 1.8 million people who earn between $85,000 and $90,000 a year ($156 billion) and considerably less than the 890,000 folks who earn between $200,000 and $250,000 a year ($197 billion).

Those earning $85,000 a year pay $10,540 a year in Social Security payroll tax, so it takes 2.5 of these workers to fund one retiree.

Those 1.8 million people pay as much Social Security payroll tax as the 50 million low-compensation workers. This reveals how the system depends on full-time, high-paying jobs to fund the program. Adding millions of low-paying part-time jobs simply won't generate the payroll tax revenues needed to keep up with the rising number of beneficiaries (57 million total).

If you want to be in the top 10% of those with earned income, you need to earn about $85,000 a year. Out of 153 million people reporting earned income, 140 million make less than $85,000 a year.

To make it into the top 5%, you need to earn $115,000 or more, and to reach that oft-mentioned 1% (it's really the 1/10th of 1% who holds the power), you need to make $250,000 or more.

As noted earlier, those earning rarefied compensation aren't paying any more Social Security payroll tax than someone earning the limit of $113,000.

We don't have enough workers earning enough and paying enough Social Security payroll tax to support 57 million retirees. There are only 13 million high-wage earners (above $85,000 annually), and those with very high incomes pay no more Social Security payroll tax than those earning $113,000.

This is not sustainable. The average Social Security benefit is $1,230 a month or about $15,000 a year. It takes the payroll taxes of roughly 10 million low-wage workers to fund 1 million retirees receiving $15,000. The system needs another 57 million decent-paying full-time jobs to be sustainable in it's current form, i.e. the ratio of full-time workers to beneficiaries needs to rise back up to 3-to-1.

Unless 57 million Martian workers agree to kick in 12.4% of their quatloos (and assuming quatloos are convertible into dollars), the system is a doomed Ponzi scheme.

System costs will be rising fast as the Baby Boom retires en masse. There is no guarantee Social Security payroll taxes will rise at the same rate. Indeed, a recession or stagnation in the job market could cause payroll taxes to decline even as benefit costs soar.

Ignoring the facts won't help us address the insolvency of pay-as-you-go social programs.

Best Buy is $10 away from an all time high. The ramp fest over the past year is insane because the company has destroyed itself. They did everything for short term stock gains and nothing for long term survivability. It is a dead company walking now. There is no inventory and beneath the shiny new coat of paint is a rotting foundation. The employees were never really that good, but now you can't even find one when you want to buy something.

Doesn't matter, Wall Street ate it up and gave insiders 400% returns.

The best performing stocks are companies that either don't make money or are close to going bankrupt. That is a great economy?

LoP, it's not a ponzi scheme- it has become a virus, and it's absolutely killing (by displacement) the healthy cells it spawned from. Personally, I can't say if I'm a healthy cell, or part of the virus- or if me and you are more important to God (not religion) than plankton.

From my perspective though, we (collectively) have become so ignorant, so self-centered, so enamored with our "stuff", so arrogant, so complacent, so indebted... my granny used to whip me with a switch when I acted in this way. I'm glad she did.

This year the new business model is stock buybacks...so their stock options look better and better..so does the eps...THEY DID NOT spend on plant and equipment..or research for that matter....just riding the gravy train..

Just because government calls something by another name doesn't make it so. The Department of Defense if really the Department of Offense. The Central Intelligence Agency is, well, the opposite. A year after the Social Security Act’s passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis. The court held that Social Security is not an insurance program, saying, “The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” In a 1960 case, Flemming v. Nestor, the Supreme Court held, “To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands.” Property rights are one of the attributes of insurance. Go look for your Social Security contract, you won't find one. If you don't have a contract you don't have insurance. What you have is a verbal agreement to provide you welfare at some rate not determined by you when you need it most. Does that answer your question?

There is no "lock box". It is a myth. What there is is IOU's that are denominated in fiat dollars. That's it. Those IOU's amount to around $2.6 Trillion. However, the liabilities of Social Security are presently $16.7 Trillion. The program is unsustainable by any measure. And it's not just unsustainable, it's immoral. There is no way to justify stealing from one person to give to another by way of direct taxation. Social Security recipients are the receivers of stolen property. I understand that seniors were sold a bill of goods but that doesn't negate the fact that Social Security is a Ponzi scheme and inter-generational theft. Take a look at Ida May Fuller. Her "contributions" to the system totaled $24.75. Over her lifetime she took $22,888.92 in "benefits". Pretty good deal if you can get it, right? But who paid for that?

@rubicon - keep in mind that the future liabilities of SS are not the same as other contracted benefits (i.e. a private annuity). SS does not have to pay out what people are expecting or what they've paid out in the past, so any present value calculation must be viewed with that in mind.

Yes, any change will be socially and political difficult, if not impossible, until it becomes even more difficult / impossible to not change. But even that inertia is very different from the force of law requirements (and reserves, etc.) of an annuity.

I thought about this earlier today. I noticed that if you pay into SS for 40 years at 1500 a year and then you die at 60 with no wife and no kids, the govt doesn't give your estate a refund. They will give your estate about 2500 for burial. So your Mom and Pop are out of luck. A wife AND KIDS WOULD GET SURVIVOR BENEFITS.

$1,230 a month? Wait till a can of fucking cat food cost $120, and a 10 day supply of your pills costs $900.

Back to work granny, your kids can't afford to feed themselves and they work 3 jobs each. What? Everyone keeps telling you that you're overqualified for that position putting groceries in a plastic bag.

Maybe you could be a poster-child for the backwards incentives that "social justice" creates? Besides, you just called me a monkey. I make your fkn car run and your toilet flush, moron. You, on the other hand, know how to push the right button to get the "free" banana you see dangled outside your cage. That free banana is gonna taste like shit when you're floating in it.

Those who receive no earned income (self-employment earnings, wages, salaries, tips, etc.) and only receive unearned income (dividends, capital gains, rents, etc.) pay no Social Security/Medicare payroll taxes.

That's not entirely correct anymore.Since Jan 1, 2013 persons with an Adjusted Gross Income (AGI) over $200,000 pay 3.8% tax on the unearned income above $200,000. This is effectively Medicare tax on unearned income, just as Medicare taxes 3.8% on all earned income above $200,000 (but 2.9% for the portion below $200,000 - for joint filing couples replace all 200k limits with 250k.)

(Recall that high-income earners only pay payroll taxes on the first $113,700 in 2013 and $117,000 in 2014. So someone earning $1,000,000 a year pays the same Social Security tax as someone making $113,700.)

The assertion that the Social Security Trust fund does not exist is patently false and betrays the propaganda purpose of the writer.

Back in the late sixties, Lyndon Johnson introduced the "unified budget" to conceal the deficits he was creating by attempting to finance the Vietnam war and the "great society" at the same time. This deception has continued to the present day, but it did not erase the Social Security Trust Fund. The fund continues intact and operative currently and has a reserve of over a trillion dollars, that is invested in special US government bonds. While current benefit payments now exceed contributions, it is only necessary to make a few small adjustments to restore its solvency. Only by making the false identification of payroll contributions as taxes into the general fund have current propagandists constructed a false claim that Social Security is "pay as you go."

Yeah, them bonds are so "special" that they have no investors- and zero value. -1 for trying to excoriate the poster with a an assertion that IOU's from one insolvent entity to another have actual value.

The pentagon budget has doubled since 9/11, giving it the incentive to start new illegal wars. When the pentagon budget is reduced to a reasonable level, it will be possible to balance the budget and maintain the social safety net.

@SKY85hawk: FICA payments are contributions because the program is voluntary. You do not have to sign up for SS, and you do not have to pay any 'contributions.' And there is no penalty or tax demanded for opting out, like there is for ObummerCare. You volunteered to contribute, and luckily, so far, most young people are volunteering too. Unfortunately, the government is the very last group you would want to be responsible for saving/managing your retirement savings, as they are proven to be irresponsible time and again. So they spent the money as it came in, optimistically assuming that there would always be moar. They seem to be poor at understanding demographics, or else figure the crash will occur on someone else's watch (ie, After Me, the Deluge).

Where are all the workers employed to become disabled? You would think the government would check into industries having such a large number of employees getting hurt. Must be a lot of doctors also getting rich when they see so many patients that are injured to the point where they can't work and have to live off the TAXPAYERS. You do have to get certified statements from doctors to be able to file for this handout don't you? And doctors do know that filing false claims is a punishable offense don't they? I would assume that the government, prior to handing out all this money that it does not have would investigate the claims, well at least the claims that are no UNION related.

The Millennials are 25% larger group than the Baby Boomers. There is no reason for these ratios to be declining. If the number of working people is declining it is because of the capital flight of the last 30 yrs to lawless undemocratic dictatorships and also the deflationary conditions caused by the banks' reduction in creating new money through lending.

The "ponzi" scheme would be working just fine but for the flaws in the design of this money system. And, if seigneurage rights belonged to the American people instead of the Oligarch owners of private banks and family trust funds, we wouldn't have any of these problems. We would have abundance for all. The even bigger ponzi scheme is the privately-owned money creation system itself. It creates money only as debt, for which the interest due is never created. The principal therefore just grows and grows as more debts are created to pay the interest on the old ones.

Any proposal that suggests that even more of our money should be going into their bogus stock market and mutual funds needs to be watched with suspicion! That money does not go to small business which is exactly where the jobs have always been created in this economy or any economy.